One of the primary appeals for FEMSA (NYSE:FMX) for some time has been its status as a "defensive growth" stock. Rising populations and incomes in Central and South America meant growth opportunities for the Coca-Cola FEMSA (NYSE:KOF) beverage operations, as well as the company's multiple retail formats, with incremental opportunities also available simply from out-executing smaller players with less scale and operating efficiency. Along with that, the company's status as a retailer of "staples" was supposed to provide some downside protection, as people still need to eat in recessions.
COVID-19 has thrown out a lot of the conventional wisdom about "defensive" names, and FEMSA is no exception, as mobility restrictions (stay at home orders and the like) have hit the business harder than expected. Even allowing for the worse-than-expected economy in Mexico, FEMSA has lagged the Mexican index by about 10% on a year-to-date basis and the S&P 500 even more significantly (close to 25%). While I do continue to believe that FEMSA is undervalued, this is a "show me" story that will require meaningful improvement in the outlook for OXXO same-store sales and margins before investors are willing to reconsider the name.
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